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It's been a tough year for pessimists. First, it was the jobless recovery -- but then the economy started creating jobs. Next it was worries about budget deficits sending long-term interest rates up -- but then interest rates fell. The last straw had to be the soaring trade deficits leading to a collapse of the dollar -- that was before the dollar began to rise. Now all that is left for the pessimists to hope for is a collapse in housing prices.
Fears of a housing bubble have been around for at least a couple of years. Despite those fears, housing prices continue to rise. While housing usually suffers during a recession, that was clearly not the case in the mild, post-NASDAQ bubble recession of 2001. Right from the beginning of the recession in 2001 and through 2004, housing continued to do well as both housing starts, sales, and prices rose steadily.
A variety of reasons are responsible for housing's strong performance. These reasons continue today. First and foremost, the average house being purchased on the average household income is more affordable today than at any time throughout the entire 1980s or 1990s. Due to low mortgage rates, the share of monthly income going to finance the purchase of a median-priced home is currently 15.1 percent, up slightly from the lows of 13.1 percent set in June 2003.

Housing Affordability

Share of Monthly Median Household Income to Finance the Purchase of a Median-Priced Home

Source: U.S. Department of Commerce

Demographics are also working to the benefit of the housing market. The children of the Baby Boom generation are coming into the housing market for the first time, creating market liquidity that enables everyone else to trade up. The Boomers themselves are buying second homes at record levels in anticipation of their retirement. And finally, ethnic populations, particularly Hispanics, are dramatically increasing their rate of home ownership. Home sales over the past three years have consistently outperformed the rest of the economy. The total number of home sales rose 9.1 percent in 2004, following gains of 11.9 percent in 2003 and 7.5 percent in 2002.
Despite the strong demand for housing, supply has not kept pace. Ever more restrictive land use regulations are making it more difficult for developers to find the real estate they need to meet consumer demand. Although the number of new housing starts came in at 1.7 million in 2004, that was down 24 percent from the housing start peak of 2.3 million set in 1972 at a time when there were 39 million fewer households. The combination of strong demand coupled with more modest growth in supply means that prices will continue to rise. Housing prices have been rising steadily over the past five years. In 2004, the median-home price rose 13.2 percent. Since 1999, the average annual increase has been 6.2 percent, more than double the increase in the consumer price index. That trend will continue.

Implications for Mass Merchandisers
The revolution in mortgage refinancing means that home equity is a ready form of cash for consumers. In 2004, consumers withdrew $315 billion from their home equity, about 3.6 percent of disposable income. The ability to transform home equity into cash gives all home owners the ability to spend well beyond their traditional limits of income.
Home furnishings have performed poorly over the last couple of years. The category has lost share of wallet to consumer electronics and home improvement. Rarely do we see the combination of a strong housing market and strong spending on home improvement and not see some follow-on spending in home furnishings. After all, one does have to fill up all that new space with something. For mass merchandisers, home furnishings represent an untapped source of future growth.

Implications for Convenience Stores
The growth in new housing means new neighborhoods. As a result, the opportunity for new store growth has never been greater. In-store, high gasoline prices have taken a toll on nongas purchases, particularly among lower-income households. A shift to higher-end goods, designer coffees, and fresh foods may be in order where appropriate to capture a larger share of the more upscale consumers' wallets.

Implications for Food Stores
The growth in new housing means new neighborhoods. As a result, the opportunity for new store growth has never been greater. Giving over more shelf space to higher-end goods that appeal to more affluent consumers may be in order where appropriate.